PRICE CHOPPER SUPERMARKETS - Case Study

Case Study
                         PRICE CHOPPER SUPERMARKETS
                       Integrated POS Services and Advanced EDI

ROGER CLARKE
Principal, Xamax Consultancy Pty Ltd, Canberra
Visiting Fellow, Department of Computer Science, Australian National University
Version of 20 March 1994
© Xamax Consultancy Pty Ltd, 1997
This document is at http://www.anu.edu.au/people/Roger.Clarke/EC/PriceChopper.html

INTRODUCTION

Price Chopper is a chain of 80 24-hour supermarkets in New England. The stores vary
considerably in size, but average about 12 checkout counters. It is headquartered in Shenectady,
in upper New York State.

During the last few years, Price Chopper has applied information technology (IT) very
aggressively, particularly to its Point of Sale (POS) operations. It is worthy of a case study both
because of the comprehensiveness of its IT strategy, and because several elements of the system
are at the leading edge.

This document comprises a brief summary of the applications, supported by documents prepared
by Larry Friedman, Vice-President Financial Services of the Price Chopper holding company,
Golub Corporation. It is based on a presentation by Larry at an IIR Conference on Plastic Cards,
in Sydney, on 18 March 1994. The details have not yet been checked with him.

BACKGROUND

In 1976, a local bank network installed clerk-assisted Point-of-Banking (POB) terminals at the
service desk in each Price Chopper store. In 1983, it installed ATMs at selected high-volume
locations. Watching the progressive growth in popularity of the financial services available on its
premises, Price Chopper resolved to offer a more extensive set of services. The attractions were
to increase sales volume in its shops, to ensure control over decision-making about what was
installed where, and to profit directly from these lines of business.

In the mid-1980s, Price Chopper installed its own ATMs and POBs at customer service desks
throughout the chain. These complement the other services offered at those locations, including
photocopying, fax and Fedex courier despatch. In 1989, the company installed its own network,
and a Stratus-based fault-tolerant switch and transaction-processing node. This captures a variety
of financial transaction-types and passes them on to the relevant financial institutions.
Additional aspects of the services, discussed below, are EFT/POS terminals at every checkout
counter, supporting a variety of payment mechanisms; and a 'do-it-yourself' checkout system on
trial at the Clifton Park store. In addition, EDI is being extended beyond purchase ordering to
encompass advance shipping notices, invoicing and payment.

EFT/POS

The majority of transactions at U.S. checkout counters are still cash (roughly 55% of transactions
and 40% of value). Cash is the cheapest form of payment transaction for the company (about 7
cents per transaction). It has no desire to wean customers away from cash, and its cashless
alternatives have not had that effect.

Although cash transactions are to be preferred, consumer demand and competitive pressures
dictate that alternative payment methods must be made available. About 5% of sales involve
welfare-related payment means (especially food stamps). About 40% of transactions and about
55% of value are therefore presented by other cashless payment forms. These are highly variable
in terms of the cost per transaction.

About 32% of transactions and 50% of the value at U.S. checkout counters involves cheques.
These are much more expensive than cash, at about 43 cents per transaction. Credit-card
transactions are a further 3% of transactions and 5% of value, and cost a massive 81 cents each.
On-line debit-card transactions, on the other hand, cost about 30 cents each, but only represent
1.5% of transactions and 2.5% of value. An off-line debit scheme ('ACH electronic cheque') is
available for small value-transactions, subject to the use of a loyalty card (to reduce the risk of
fraud). Transactions take two days to clear, and each transaction costs 28 cents. It represents a
further 1.7% of transactions at U.S. checkout counters, but only 0.4% of value. It is desirable
from the perspective of U.S. supermarket chains that non-cash transactions be nudged towards
one or other of the debit schemes. [I have no statistics on the percentages by transaction volume
and value at Price Chopper stores, but they presumably now enjoy a lower percentage of
expensive transactions than the national average].

Price Chopper issues its own frequent shopper card, which performs multiple functions. Payment
may be performed using the magnetic stripe on the card to effect an ACH electronic cheque
transaction (which involves in-house checking against a stop-list, and is otherwise a bank-
guaranteed payment). In addition, the bar-code on the front of the card may be scanned at the
cash register to support various frequent buyer programs. The cumulative frequent buyer points
are printed at the end of the receipt. [I have no statistics on the extent of usage of these
functions].

Another interesting feature of POS operation at Price Chopper stores is that the cashback option
is restricted to $30 more than the amount of the purchase. The company prefers to attract
customers to the centrally-located ATM, even though that means moving the excess cash a
greater distance than would be necessary if balancing of the supply and demand for cash were to
be achieved among nearby cash registers.

SELF-SERVICE CHECKOUT

A pilot test of a customer self-service checkout system is now being conducted in the Clifton
Park store. It is claimed to be the first supermarket in the world to offer such a service. The

procedure involves a series of stations at which customers:

   •   scan the bar-codes of each of the products they wish to purchase;
   •   place the goods in a bag;
   •   make payment; and
   •   receive change.

Currently, a single checkout supervisor is placed beside the outlet path for the two active
systems. The checkout lane is a great deal narrower than conventional counters, and it is
intended that four self-service checkouts will be installed in the place of two conventional
checkouts, and that all four will be supervised by a single employee. Each installation costs
about $15,000, compared with about $10,000 for a normal POS.

There are several quite sophisticated elements of the design:

   •   the receiving bag is on a weighing scale which provides a check between the bar-code
       scanned and the item added to the bag (to reduce the incidence of high-value items being
       bagged using a low-value code);
   •   items without bar-codes (in particular produce and bakery items) are dealt with using a
       customer-selected 'no bar code' button. An overhead camera displays the item on a screen
       in front of the lane supervisor, who inputs the appropriate value, or value per unit of
       measure;
   •   measures are also in place to dealw with large items, voluminous purchases and items
       whose bar-codes do not find a match in the computer; and
   •   virtually all forms of payment are supported, except cheque. One station enables credit-
       card and on-line debit-card payment, and another is for cash payment, and receipt of
       change in notes and/or coins.
    •
The customer interaction is undertaken using an 80486-driven display, and is sufficiently flexible
that it may be modified to support additional services in future, such as the payment of bills from
other companies and from utilities, airline reservations, etc. In this way, Price Chopper would be
able to extend the already very substantial financial services it offers to its supermarket
customers.

FURTHER ENHANCEMENTS PLANNED

In Australia, government pensions and allowances are generally paid directly into beneficiaries'
accounts with financial institutions. In the United States, however, most benefits are still paid in
the form of special-purpose documents, and some of the funds are ear-marked for specific
purposes, in particular food stamps for the puchase of food. The Clinton Administration is
committed to implementation of electronically based benefits transfer. Price Chopper is
committed to participation in this scheme, with a view to significantly reducing its costs in
handling these remaining paper-based transactions.

Price Chopper also intends using its well-established infrastructure to support micro or target

marketing. For example, they will be able to detect the presence of an occasional customer at
their checkout counter and make a special offer (a 'delayed purchase incentive') designed to turn
the person into a frequent shopper.

Price Chopper is participating in the emergence of efficient customer response (ECR), a
generalised form of quick response (QR). This involves partnering along the industry value-
chain, and cooperation among the partners' data processing systems. It opens up a variety of new
opportunities, such as the conversion of coupons from paper to electronic form, and the
customisation of coupon offers.

EDI AT POINT OF RECEIPT

Price Chopper has, like most supermarkets in the United States, long ago implemented EDI for
purchase orders. About 30% of deliveries to Price Chopper stores are now received by direct
store delivery (DSD) from suppliers, rather than passing through the company' own warehouses.
To exploit this development, Price Chopper has recently implemented EDI for goods receipt and
invoicing. The purposes in doing so were to ensure capture of all relevant data at the point of
origin, and hence reduce both the overheads and disruption arising from errors, and the treble-
handling of deliveries as goods receipts, as invoice-receipts, and as invoice-payments.

Suppliers have the option of sending an EDI Advance Shipping Notice to Price Choppers, such
that the necessary details are available to the receiving warehouse when the delivery vehicle
arrives at the dock. Price Choppers prefers, however, that delivery drivers carry the transactions
with them, stored in a hand-held unit. By plugging the hand-held unit into the appropriate
sockets in Price Chopper's delivery areas, the drivers provide the data into Price Chopper's
system [I am not clear as to why Price Choppers prefers it that way]. Price Chopper is also
supporting smartcard-based transmission of delivery data, by installing smart-card readers at
receiving bays.

The receiving warehouseman keys the quantity received on his or her own hand-held unit
(without first seeing the quantity the driver intended to deliver). If the quantities match, the line-
item is agreed and approved for payment. If not, a second count is undertaken, involving the
driver as well. The second count is treated as conclusive, and that amount approved for payment.
The driver plugs his or her hand-held device back into a Price Choppers' socket, and receives a
copy of the approved invoice, for provision back to the supplier.

The document standards scheme supporting these arrangements is DEX-UCS. This is possible
because UCS [uniform communications standard? a version of ANSI X12 specialised to the
grocery industry?] now supports DSD (direct store delivery), and in particular DEX (direct
exchange). The software to handle the processing is provided by Retail Management Systems
(RMS).

CONCLUSIONS

Price Chopper considers that it is fulfilling the objectives of its aggressive and ambitious

application of IT to the point of sale. As a result of internal cost-savings, increased custom, and
the fees it gains from the sale of transaction data to financial institutions, its network operations
are contributing a million dollars per annum to corporate profits.

These community service pages are a joint offering of the Australian National University (which provides
                  the infrastructure), and Roger Clarke (who provides the content).

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                                        Xamax Consultancy Pty Ltd.
                                         For further details, contact:
                                               Larry Friedman
                                      Vice President Financial Services
                                        Price Chopper Supermarkets
                                                P.O. Box 1074
                                           Schenectady NY 12301
                                              UNITED STATES
                                            Tel: +1 518 356 9326
                                           Fax: +1 518 356 6897